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September 2010 
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10Questions : Foreign Investment In India |
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August 2010 |
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FW speaks with Preeti Mehta at Kanga & Company about foreign investment in India.
FW: Can you outline some of the policy initiatives undertaken by the Indian Government to encourage foreign direct investment (FDI) in India?
Mehta: The several policy initiatives taken by the Government of India in the 1990s have helped to transform the country from a restrictive regime with regard to foreign direct investment to a liberal one. Foreign direct investment in India is encouraged in almost all sectors of the country’s economy under the automatic route, although there are a few Indian sectors in which foreign direct investment has been restricted by the government. Recently the government released a comprehensive FDI policy document effective from 1 April 2010, consolidating all prior policies and regulations on FDI which are contained in FEMA, 1999, RBI Regulations and press notes, press releases and clarifications, into one document. Furthermore, the Foreign Investment Promotion Board is allowed to clear FDI proposals up to certain amounts, thus reducing the number of proposals to be reviewed and approved by the Cabinet Committee of Economic Affairs and thereby expediting FDI inflow.
FW: Are there any restrictions on FDI?
Mehta: FDI restrictions have been imposed in a number of sectors in order to protect the interests of the nation. Sectors in which FDI is prohibited include arms and ammunition, atomic energy, chit fund business and lottery business. FDI in certain sectors is allowed up to prescribed thresholds, such as 26 percent for insurance.
FW: What forms of FDI are you seeing in the market?
Mehta: FDI can be made through financial collaborations, joint ventures, capital markets including euro issues, private placements or preferential allotments. Most private equity investors make investments by way of a private placement. As per the FDI Policy, equity shares, fully and mandatorily convertible preference shares and debentures may be issued subject to pricing guidelines and valuation norms prescribed under the regulations. Instruments which are not compulsorily convertible are treated as borrowings and subjected to the prescribed guidelines on External Commercial Borrowings. Furthermore, in most sectors, FDI is allowed under the automatic route, i.e., without having to obtain any approvals. However, government approval is required in cases where there are issues such as industrial licensing requirement, previous ventures and tie ups, prescribed thresholds being exceeded, the public offer requirement under the takeover code being triggered, etc.
FW: What factors are attracting FDI in India?
Mehta: India has an investor friendly environment under the current liberalised regime on foreign investment. Apart from this, India’s huge market base and fast-developing spending habits of middle-class, favourable business environment, good administrative setup, attractive foreign policies, available, abundant skilled workforce, and attractive incentives for investors, have contributed to India becoming one of the preferred destinations for investors. Furthermore, India has an advantage over other countries, including China, in terms of being an ideal destination for investments, mainly due to its vibrant democratic setup, a broad legal framework and independent judicial system. Apart from these factors, the presence of a vast network of bank branches, financial institutions, and a well-organised capital market contribute to making India a preferred destination over other places for foreign investors.
FW: Which sectors are proving popular with foreign investors?
Mehta: A sector-wise analysis of FDI inflow in India reveals that maximum FDI has taken place in the service sector, including telecommunications, information technology, travel and many others. The service sector is followed by the manufacturing sector in terms of FDI. High volumes of FDI take place in electronics and hardware, automobiles, pharmaceuticals, cement, metallurgical and other manufacturing industries.
FW: What is the current policy for FDI in the retail and real estate sectors?
Mehta: Until recently, non-resident Indians and persons of Indian origin could invest in real estate in India. However, the government has liberalised this sector. Although 100 percent FDI is allowed in the hotel and tourism industries, FDI for pure real estate development is allowed subject to some conditions, such as a minimum land area of 10 hectares for serviced housing plots, and a minimum built-up area of 50,000 square miles in the case of construction projects, and a minimum capitalisation norm of $10m for a wholly-owned subsidiary and $5m for joint ventures. Besides this, the investment is required to be brought in within six months of commencement of business, and there is a lock-in for three years. As far as the retail sector is concerned, presently FDI is permitted up to 51 percent under single-brand retail trading, and upto 100 percent in the cash-and-carry segment. In early July the Indian government released a discussion paper on allowing FDI in multi-brand retail in the country and the policy may undergo a change depending on the responses received from various stakeholders.
FW: Are there any restrictions on FDI in same or competing business or for re-entering the Indian market?
Mehta: Previously, if a foreign collaborator had an existing venture or tie-up in India as of 12 January 2005, through investment, technical collaboration or a trade mark agreement in the same or allied field, it would require prior government approval for any new tie up, irrespective of the quantum of fees and royalty.
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